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CHSE Odisha Banking & Insurance study materials
CHSE Odisha Banking & Insurance study resources

CHSE Odisha Banking & Insurance: Introduction to Banking

CHSE Odisha Banking & Insurance · Work through your exam, one topic at a time.

All guide sections

Introduction to Banking

What this domain tests

Introduction to Banking fixes the vocabulary the rest of the paper assumes: what a bank legally is, what it does, how it creates deposits, and how a central bank differs from a commercial bank. Questions here are usually definitional and conceptual, so precise wording of the statutory definition earns marks.

Core rules and concepts

  • Legal definition (Banking Regulation Act 1949, s.5(b)): banking means accepting, for the purpose of lending or investment, deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.
  • Primary functions: accepting deposits (demand - savings and current; time - fixed and recurring) and lending (cash credit, overdraft, term loans, bill discounting).
  • Secondary functions: agency work (cheque collection, standing instructions, purchase and sale of securities) and general utility (lockers, demand drafts, letters of credit, forex).
  • Credit creation: banks lend out deposits net of reserves, and the re-deposited money supports further lending.
  • Evolution markers: Bank of Hindustan (1770), Bank of Bengal (1806), Imperial Bank (1921), RBI (1935), nationalisation of 14 banks in 1969 and 6 in 1980, reforms after 1991.
  • The RBI does not accept deposits from the general public or lend to them; it is the bankers' bank and lender of last resort.

Worked example

A customer deposits ₹1,000. With a cash reserve ratio of 4% and no cash leakage, the theoretical multiplier is 1/0.04 = 25, so deposits can reach ₹25,000 and about ₹24,000 is credit created. With 20% of loans leaking into cash, the multiplier becomes 1/(0.04 + 0.20) ≈ 4.17, giving roughly ₹4,167.

Traps that cost marks

  • Saying banks lend the full amount of a deposit; they lend the excess over reserves.
  • Confusing CRR (cash with RBI, no interest) with SLR (approved securities, earns interest).
  • Calling the RBI a commercial bank, or confusing the bank rate with the repo rate, which is the main policy rate for lending against government securities.